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Empirical evidence on the Euler equation for investment in the US

Author

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  • Guido Ascari

    (University of Pavia and De Nederlandsche Bank)

  • Qazi Haque

    (University of Adelaide)

  • Leandro M. Magnusson

    (University of Western Australia)

  • Sophocles Mavroeidis

    (University of Oxford)

Abstract

Is the typical specification of the Euler equation for investment employed in DSGE models consistent with aggregate macro data? Using state-of-the-art econometric methods that are robust to weak instruments and exploit information in possible structural changes, the answer is yes. Unfortunately, however, there is very little information about the values of the parameters in aggregate data because investment is unresponsive to changes in capital utilization and the real interest rate. Bayesian estimation using fully-specified DSGE models is more accurate likely due to informative priors and cross-equation restrictions.

Suggested Citation

  • Guido Ascari & Qazi Haque & Leandro M. Magnusson & Sophocles Mavroeidis, 2023. "Empirical evidence on the Euler equation for investment in the US," School of Economics and Public Policy Working Papers 2023-05 Classification-C2, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2023-05
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2023-05.pdf
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    2. Nicholas Stern & Joseph Stiglitz & Charlotte Taylor, 2022. "The economics of immense risk, urgent action and radical change: towards new approaches to the economics of climate change," Journal of Economic Methodology, Taylor & Francis Journals, vol. 29(3), pages 181-216, July.
    3. Colombo, Emilio & Furceri, Davide & Pizzuto, Pietro & Tirelli, Patrizio, 2024. "Public expenditure multipliers and informality," European Economic Review, Elsevier, vol. 164(C).
    4. Andreas Tryphonides, 2023. "Identifying Preferences when Households are Financially Constrained," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 521-546, December.
    5. van den End, Jan Willem & Konietschke, Paul & Samarina, Anna & Stanga, Irina M., 2021. "Macroeconomic reversal rate in a low interest rate environment," Working Paper Series 2620, European Central Bank.
    6. Qazi Haque & Leandro M. Magnusson, 2023. "Identification Robust Empirical Evidence on the Open Economy IS‐Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 345-372, April.
    7. Elminejad, Ali & Havranek, Tomas & Irsova, Zuzana, 2022. "Relative Risk Aversion: A Meta-Analysis," EconStor Preprints 260586, ZBW - Leibniz Information Centre for Economics.
    8. Carlos Velasco & Xuexin Wang, 2021. "Instrumental variable estimation via a continuum of instruments with an application to estimating the elasticity of intertemporal substitution in consumption," Working Papers 2024-09-06, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    9. Diana Gabrielyan & Lenno Uusküla, 2022. "Inflation Expectations And Consumption With Machine Learning," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 142, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    10. Andreas Tryphonides, 2023. "Identifying Preferences when Households are Financially Constrained," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 521-546, December.
    11. Bofinger, Peter & Geißendörfer, Lisa & Haas, Thomas & Mayer, Fabian, 2021. "Discovering the True Schumpeter - New Insights into the Finance and Growth Nexus," CEPR Discussion Papers 16851, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    Investment; Adjustment costs; Weak identification.;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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